Reflections on the Cross-Border Tax Challenges of the Digital Economy

I. Introduction

Back in the Mesozoic era when I first began teaching courses on both international and U.S. subnational taxation, I would tell my students that the questions in the two courses were fundamentally the same. After all, I would suggest, cross-border taxation is cross-border taxation, and whether the taxing jurisdiction is a national or a subnational jurisdiction does not change the underlying inquiry. I would then observe, however, that the answers to the questions in the two contexts often were different. I would illustrate the point by noting that in both the international and subnational corporate income tax contexts the fundamental question was how to attribute income to the taxing jurisdiction. I would then point out that the answer in the international context was generally based on arm’s-length transfer pricing principles, while the answer in the U.S. subnational context was generally based on formulary apportionment. When it came to indirect taxation, I would explain that in both the international and U.S. subnational contexts the fundamental question was how to assign and enforce taxing rights over consumption on cross-border transactions. I would then note that the answer in the international context was based on a staged-collection value added tax whereas the answer in the U.S. subnational context was based on a single-stage retail sales tax (RST).

But times have changed, as my grandchildren remind me, at least when they are not buried in their handheld devices. Indeed, those handheld devices epitomize the change. The emergence and explosive growth of the digital economy have created profound tax challenges for cross-border taxation that have been widely recognized. As the OECD/G-20 inclusive framework on Base Erosion and Profit Shifting observes in its “Programme of Work to Develop a Consensus Solution to the Tax Challenges Arising From Digitalisation of the Economy,”¹ the broad challenges in the direct tax area chiefly relate to “the question of how taxing rights on income generated from cross-border activities in the digital age should be allocated among jurisdictions.”² In the indirect tax area, the OECD/G-20 work program identifies “new challenges” related to the collection of VAT/GST “on the continuously growing volumes of goods and services that consumers purchase online from foreign suppliers.”³ Although the OECD/G-20 BEPS initiative is not addressed to subnational cross-border tax issues, one may add without fear of contradiction that similar challenges have arisen in the subnational context, at least in the United States.⁴

This brings me to the central theme of this article. The challenges of the digital economy not only raise similar questions for international and subnational cross-border taxation, as challenges to cross-border taxation always have, but they are also spawning similar responses — or proposed responses — in both the international and subnational contexts, which has not always been the case. Consider, for example, the concept of nexus based on a “significant economic presence”; the allocation of direct taxing rights based on formulary apportionment, with an emphasis on the contribution of the market to the production of income; and the enlistment of online marketplace platforms to facilitate collection of indirect taxes. Each of these notions reflects actual or proposed responses to the digital economy in both the international and U.S. subnational contexts.

My purpose here is not to enter into the spirited debate over the relative merits of the various approaches to dealing with the tax challenges of the digital economy — an ongoing debate on which much has been written, some of it by me,⁵ and will continue to be written as the debate persists. Rather my more modest objective here is to describe the common approaches in the international and U.S. subnational contexts to the tax challenges of the digital economy; to delineate the similarities and differences between them; and to identify the lessons that the U.S. subnational cross-border responses to the tax challenges of the digital economy may contain for analogous international cross-border challenges.⁶

One additional introductory caveat is in order before we embark on an exploration of these issues. When comparing international and subnational approaches to cross-border taxation, one should keep in mind the dangers of “lost in translation” concerns in light of the fact that subnational jurisdictions, like member states of the European Union, are “bound by a common legal framework”⁷ governing (or potentially governing) cross-border transactions, and this may inform or distinguish the responses to the tax challenges of the digital economy in the respective contexts.

II. Nexus

Let us begin with what is probably the most fundamental concept informing or limiting cross-border taxation — the concept of nexus. In common parlance, nexus means simply a connection or a link. In the cross-border tax context, nexus carries with it the further understanding of a connection or link with a person sufficient to justify the exercise of a state’s power to require that person to pay or collect taxes on a tax base over which the state asserts taxing rights.⁸ Thus the OECD/G-20 describes a “nexus rule” as “a threshold that determines the circumstances in which a foreign enterprise is considered to have a sufficient level of economic activity in a state to justify taxation in that state.”⁹ Similarly, in its contemporary doctrine demarcating the implied restraints that the U.S. Constitution’s commerce clause imposes on subnational state taxation of interstate commerce,¹⁰ the Supreme Court has identified the existence of a “substantial nexus with the taxing State” as the threshold restraint on the exercise of state tax power in the cross-border context,¹¹ and the Court has declared that “such a nexus is established when the taxpayer [or collector] ‘avails itself of the substantial privilege of carrying on business’ in that jurisdiction.”¹²

A. Nexus and Physical Presence

Historically, the concept of nexus has been associated with physical presence. This is true whether one is talking about direct taxes or indirect taxes, or about international cross-border issues or U.S. subnational cross-border issues. Thus, the legal definition of nexus with which the international tax community is probably most familiar — the permanent establishment concept incorporated in the OECD model tax convention — is the quintessential embodiment of physical presence, namely, “a fixed place of business . . . especially . . . a place of management; a branch; an office; a factory; a workshop; and a mine, or oil or gas well, a quarry or any other place of extraction of natural resources.”¹³ Although the PE concept does not apply in the U.S. subnational direct tax context, the most important national legislation limiting cross-border state taxation contains a nexus limitation based on physical presence, preventing states from imposing net income taxes on foreign enterprises “if the only business activities within such State . . . are . . . (1) the solicitation of orders . . . for sales of tangible personal property. . . filled by shipment or delivery from a point outside the state.”¹⁴

Similarly, in the international indirect tax context, the nexus concept has historically reflected physical presence, whether in the form of a “fixed establishment”¹⁵ or analogous manifestations of physical presence.¹⁶ In the U.S. indirect tax context, the Supreme Court for many years had endorsed a bright-line rule of physical presence as the required nexus that a nonresident vendor must have with a state before the state could require the vendor to comply with the state’s RST collection obligations.¹⁷

B. Nexus and the Digital Economy

But, to return to my grandchildren’s point, times have changed. To state the point quite simply, as the U.S. Supreme Court declared in South Dakota v. Wayfair Inc.,¹⁸ in the digital economy “‘a business may be present in a State in a meaningful way without’ that presence ‘being physical in the traditional sense of the term.’”¹⁹ This was hardly a novel point in 2018, when Wayfair was decided. As Jeffrey Owens had observed 20 years earlier when the digital economy was still in its infancy, “the principle of physical presence comes under pressure where a business is able to exploit a market in a country without establishing a physical presence there” and that “the concept of geographical fixedness may be inapplicable or even irrelevant in the Internet environment.”²⁰ The chorus of voices that reiterated and elaborated on Owens’s observation over the next two decades gradually became deafening,²¹ culminating (for the moment at least) in a concerted search for “the development of a concept of remote taxable presence (i.e. taxable presence without traditional physical presence) and a new set of standards for identifying when such a remote taxable presence exists.”²²

Accordingly, without pretending to put too fine a point on it, one may suggest that the existing “state of play” regarding the tax challenges of the digital economy regarding nexus is that the law — whether in the form of “hard law” as reflected in legislatively or judicially articulated legal rules in various jurisdictions, or in the form of “soft law” as reflected in best practices guidance articulated by such globally respected institutions as the OECD — is essentially playing catch-up with economic reality.

1. U.S. Subnational Nexus Developments: Wayfair

Wayfair, of course, is Exhibit 1 in this “state of play,” at least for a U.S. subnational tax lawyer. Wayfair involved a frontal assault on the bright-line rule of physical presence — to which we have already alluded²³ — as the prevailing nexus standard for a state’s right to require an out-of-state vendor to comply with the state’s RST collection obligations. South Dakota enacted a statute requiring out-of-state sellers to collect tax “as if the seller had a physical presence in the state”²⁴ if the seller, on an annual basis, delivered more than $100,000 of goods or services into the state or engaged in 200 or more separate transactions for the delivery of goods into the state.²⁵ The statute foreclosed retroactive application of those provisions until the constitutionality of the law was clearly established.²⁶ The online retailers who challenged the statute were among the largest online retailers in the United States and indisputably satisfied the statute’s requirements.²⁷

In Wayfair, the U.S. Supreme Court unequivocally repudiated the physical presence test of nexus it had previously endorsed under its dormant commerce clause jurisprudence²⁸ and in its stead embraced a test of nexus based on “economic and virtual contacts.”²⁹ In approaching the nexus issue, the Court first made it clear that there was no issue in the case regarding the state’s jurisdiction over the taxing rights at issue (what I have called “substantive jurisdiction” in earlier writing),³⁰ observing that “all agree that South Dakota has the authority to tax these transactions,” because “generally speaking a sale is attributable to its destination.”³¹ Rather the only nexus issue in the case was “whether South Dakota may require remote sellers” without a physical presence in the state “to collect and remit the tax”³² over which it had undisputed taxing rights (what I have called “enforcement jurisdiction” in earlier writing).³³

A detailed examination of the Court’s jurisprudential path through the U.S. constitutional nexus doctrine to arrive at its conclusion that the physical presence rule of nexus “is unsound and incorrect”³⁴ lies beyond the scope of this article.³⁵ The principal thrust of the Court’s opinion, however, is captured in its repeated admonition that the physical presence rule is unmoored from the economic reality of the digital economy with harmful consequences for the fair and practical enforcement of U.S. RSTs. Thus, the Wayfair Court declared:

• “Each year, the physical presence rule becomes further removed from economic reality and results in significant revenue losses to the States.”³⁶

• “Although physical presence “‘frequently will enhance’” a business’ connection with a State, “‘it is an inescapable fact of modern commercial life that a substantial amount of business is transacted . . . [with no] need for physical presence within a State in which business is conducted.’”³⁷

• “The administrative costs of compliance, especially in the modern economy with its Internet technology, are largely unrelated to whether a company happens to have a physical presence in a State. For example, a business with one salesperson in each State must collect sales taxes in every jurisdiction in which goods are delivered; but a business with 500 salespersons in one central location and a website accessible in every State need not collect sales taxes on otherwise identical nationwide sales . . . The physical presence rule is a poor proxy for the compliance costs faced by companies that do business in multiple States.”³⁸

• “[The physical presence rule] puts both local businesses and many interstate businesses with physical presence at a competitive disadvantage relative to remote sellers. Remote sellers can avoid the regulatory burdens of tax collection and can offer de facto lower prices caused by the widespread failure of consumers to pay the tax on their own.”³⁹

• “Rejecting the physical presence rule is necessary to ensure that artificial competitive advantages are not created by this Court’s precedents. This Court should not prevent States from collecting lawful taxes through a physical presence rule that can be satisfied only if there is an employee or a building in the State.”⁴⁰

• “Modern e-commerce does not align analytically with a test that relies on . . . physical presence.”⁴¹

• “The ‘dramatic technological and social changes’ of our ‘increasingly interconnected economy’ mean that buyers are ‘closer to most major retailers’ than ever before — ‘regardless of how close or far the nearest storefront.’ Between targeted advertising and instant access to most consumers via any internet-enabled device, ‘a business may be present in a State in a meaningful way without’ that presence ‘being physical in the traditional sense of the term.’ A virtual showroom can show far more inventory, in far more detail, and with greater opportunities for consumer and seller interaction than might be possible for local stores. Yet the continuous and pervasive virtual presence of retailers today is, under [the physical presence rule], simply irrelevant. This Court should not maintain a rule that ignores these substantial virtual connections to the State.”⁴²

• “The physical presence rule . . . that . . . allows remote sellers to escape an obligation to remit a lawful state tax is unfair and unjust. It is unfair and unjust to those competitors, both local and out of State, who must remit the tax; to the consumers who pay the tax; and to the States that seek fair enforcement of the sales tax, a tax many States for many years have considered an indispensable source for raising revenue.”⁴³

• “The physical presence rule . . . must give way to the ‘far-reaching systemic and structural changes in the economy’ and ‘many other societal dimensions’ caused by the Cyber Age.”⁴⁴

Once the Court in Wayfair had discarded the physical presence rule as an essential component of its commerce clause nexus standard, the Court’s only remaining task was to apply its contemporary commerce clause nexus standard to the South Dakota statute. As noted above, the Court had declared that “such a nexus is established when the taxpayer [or collector] ‘avails itself of the substantial privilege of carrying on business’ in that jurisdiction.”⁴⁵ The decision followed easily:

2. U.S. Subnational Post-Wayfair Nexus Developments

It is critical to recognize and emphasize that Wayfair was not the end of the story of nexus in the digital economy in the U.S. subnational cross-border context — to the contrary, it was only the beginning. Although the Court in Wayfair indicated that an out-of-state enterprise’s nexus may be measured by its “economic and virtual contacts” with the state,⁴⁷ one does not need to be a tax professional to recognize that the foregoing standard provides little concrete guidance as to the nature and level of “economic and virtual” contacts that will satisfy constitutional nexus norms for remote sellers. As of late 2019, the only thing we know for sure about these norms is that sellers that deliver “more than $100,000 of goods or services” into a state or “engage in 200 or more separate transactions” in a state on an annual basis have “economic and virtual contacts” with the state that are “clearly sufficient” to satisfy constitutional nexus standards.

Having said that, one must underscore several other things we also know for sure at this juncture that will be critical in shaping the framework governing the required nexus for remote vendors’ post-Wayfair tax collection obligations. First, vendors’ tax collection obligations will depend critically on the criteria set forth in state sales and use tax statutes (such as those embodied in the statute at issue in Wayfair), and not merely on the vague constitutional criterion of purposeful “availment” of a state’s economic market that circumscribes state taxing authority. Indeed, the states have already overwhelmingly embraced thresholds identical or analogous to those in the South Dakota statute as a safe harbor from constitutional challenges.⁴⁸ Second, Wayfair may well spur congressional action to impose nationwide standards governing states’ power to require remote vendors to collect sales and use taxes on interstate trade. Third, the inevitable litigation over the application of the Wayfair nexus standards is likely to add some flesh to the bare bones of the criteria set forth in the Court’s opinion.

In connection with the third point, it is worth noting that the Court, after holding that “the substantial nexus requirement . . . is satisfied in this case,”⁴⁹ went on to observe that “the question remains whether some other principle in the Court’s Commerce Clause doctrine might invalidate the Act.”⁵⁰ Because the preexisting physical presence rule had been an “obvious barrier”⁵¹ to enforcement of the South Dakota statute, the Court observed that these other aspects of the Court’s commerce clause doctrine (apart from the substantial nexus requirement) that prevented discrimination against or undue burdens upon interstate commerce had not been litigated or briefed. The Court accordingly remanded the case for consideration of such claims.⁵²

In so doing, however, the Court strongly implied that such claims would not be persuasive on the facts presented and, more importantly, effectively provided guidance to other states as to how to design tax regimes that would survive commerce clause scrutiny in a post-Wayfair world. Specifically, the Court identified several features of South Dakota’s tax system “that appear designed to prevent discrimination against or undue burdens upon interstate commerce.”⁵³

First, the nexus statute provided a safe harbor for those who transact only limited business in the state. Second, the statute did not apply retroactively. Third, South Dakota was one of more than 20 states that had adopted the Streamlined Sales and Use Tax Agreement, which “standardizes taxes to reduce administrative and compliance costs.”⁵⁴ As the Court elaborated:

3. Implications of U.S. Subnational Nexus Developments for the International Nexus Debate

If there is an overarching takeaway from U.S. subnational nexus developments for the international nexus debate, it is that a concept of nexus based on physical presence is no longer fit for service. Wayfair’s repudiation of the physical presence rule could not have been clearer,⁵⁶ and the states’ legislative response to Wayfair reinforces and reaffirms the rejection of physical presence as an essential element of taxable presence.⁵⁷

The underlying concerns spawned by the reality of the digital economy that have informed the U.S. subnational approach to nexus appear to be equally relevant to the international dialogue over nexus and the search for “the development of a concept of remote taxable presence (i.e. taxable presence without traditional physical presence) and a new set of standards for identifying when such a remote taxable presence exists.”⁵⁸

Indeed, it is worth noting, particularly for those who do not labor in the vineyards of U.S. subnational taxation and might be inclined to dismiss the relevance of Wayfair as an issue peculiar to enforcement of indirect taxes in the United States,⁵⁹ that the allegedly “novel concept”⁶⁰ of a nexus reflecting “significant economic presence” in the direct tax context has in fact been the prevailing nexus norm for direct taxation in the U.S. subnational direct tax context for the past quarter-century.⁶¹ The explanation for this development lies in the wise observation of Justice Oliver Wendell Holmes, who famously remarked (in a tax case) that “a page of history is worth a volume of logic.”⁶²

The “page of history” in the evolution of U.S. subnational nexus rules may be briefly summarized as follows: The U.S. Supreme Court originally articulated the physical presence nexus rule in a 1967 case involving the nexus that an out-of-state seller must have with a state before the state can compel the seller to collect tax on sales into the state.⁶³ In 1992 the Supreme Court revisited the question in another case involving the same issue in the same context.⁶⁴ Although the Court reaffirmed the physical presence rule of nexus for imposing tax collection obligations on out-of-state sellers, it did so in a narrow opinion that was almost apologetic in its defense of the physical presence rule. The Court stressed the reliance interests that the physical presence rule had created for mail-order sellers, observing that the rule “has become part of the basic framework of a sizeable industry”⁶⁵ and that the “the mail-order industry’s dramatic growth . . . is due in part to the bright-line exemption from taxation.”⁶⁶ The Court further noted that its “jurisprudence might not dictate the same result were the issue to arise for the first time today.”⁶⁷ Finally, and most significantly for our purposes, the Court declared that “we have not, in our review of other types of taxes, articulated the same physical presence requirement that [our precedent] created for sales and use taxes.”⁶⁸

The state courts did not take long to read the handwriting on the wall. A little over a year after the Court’s decision reaffirming the physical presence nexus rule in the indirect tax context, the South Carolina Supreme Court sustained a corporate income tax imposed on a physically remote owner of trademarks regarding royalties it received from in-state licensees.⁶⁹ The state court dismissed the taxpayer’s contention that “it does not have a substantial nexus with South Carolina because it is not physically present in this state” in a brief footnote,⁷⁰ observing that “the U.S. Supreme Court recently revisited the physical presence requirement . . . and, while reaffirming its vitality as to sales and use taxes, noted that the physical presence requirement had not been extended to other types of taxes.”⁷¹ Over the succeeding 25 years, state courts overwhelmingly embraced a concept of “economic nexus” as distinguished from physical presence as the nexus standard for corporate income and other direct taxes.⁷² As the West Virginia Supreme Court declared in sustaining a corporate income tax on MBNA America Bank, which had no physical presence in the state:

It may also be worth noting that during the quarter-century that state courts generally adopted an economic nexus standard for direct taxes, several states adopted legislation asserting nexus for income and other business activity taxes if their in-state sales or receipts exceeded a defined threshold.⁷⁴

4. The OECD Secretariat’s Proposal for a ‘New Nexus’

One cannot help wondering whether those charged by the OECD secretariat with developing a “unified approach” to the tax challenges of the digital economy were not inspired by the developments in the U.S. subnational cross-border context. Indeed, the secretariat’s proposal for a new nexus reads like it could have been another excerpt from the U.S. Supreme Court’s opinion in Wayfair⁷⁵:

To be sure the secretariat’s new nexus proposal is associated with the creation of “new taxing rights” and the “allocation of taxing rights,”⁷⁷ about which there was no issue in Wayfair.⁷⁸ Nevertheless, the substance of the secretariat’s nexus proposal, “a sustained and significant involvement in the economy of a market jurisdiction” indicated by a “revenue threshold,”⁷⁹ is essentially the same as the nexus concept embraced by the Wayfair Court: “carrying on business” in a jurisdiction through “economic and virtual contacts” indicated by revenue and transactional thresholds,⁸⁰ and by the “significant economic presence” standard of nexus embodied in U.S. subnational direct tax case law.⁸¹

5. Economic Nexus and Enforcement Jurisdiction

Whatever may be the logical force of the U.S. subnational nexus developments reflected in the Wayfair Court’s observation that “‘while nexus rules are clearly necessary,’ the Court ‘should focus on rules that are appropriate to the twenty-first century not the nineteenth,’”⁸² it would be shortsighted to conclude this brief discussion of the implications of U.S. subnational nexus developments for the international nexus debate without considering one significant difference between the application of nexus rules in the two contexts,⁸³ specifically, the matter of enforcement jurisdiction.⁸⁴

Despite the theoretical shortcomings of a nexus rule defined by physical presence,⁸⁵ it does have a feature that supports its role in the international context as a threshold for determining “the circumstances in which a foreign enterprise is considered to have a sufficient level of economic activity in a state to justify taxation in that state.”⁸⁶ Namely, it tends to align the circumstances in which tax obligations are recognized with those in which tax obligations can be enforced. When a foreign enterprise is physically present in a state, for example through “a fixed place of business” or other facilities,⁸⁷ a state ordinarily has legal means at its disposal to assure that the enterprise complies with its tax obligations by exercising its legal authority directly over the foreign enterprise, its personnel, or its assets. By contrast, when a foreign enterprise is not physically present in a state, the state’s ability to enforce tax obligations against the enterprise may be considerably more problematic.

Although a nexus rule defined by physical presence has the same virtues regarding enforcement jurisdiction in the U.S. subnational context that it has in the international context, when an out-of-state enterprise is not physically present in a state in a U.S. subnational context, a state typically can enforce its tax obligations against the remote out-of-state enterprise if the enterprise is physically present in another state, as it often will be.⁸⁸ The explanation for this difference in enforcement jurisdiction between the two contexts lies in the “lost in translation” caveat to which we alluded at the outset of this article, regarding the distinction between those jurisdictions that are “bound by a common legal framework” and those that are not.⁸⁹

A simple example reveals the fundamental difference in enforcement jurisdiction in the interstate and international contexts. Let us assume that Country A and U.S. State A have both adopted a nexus standard of “significant economic presence,” measured by €100,000 of annual receipts associated with customers or activities in Country A or State A, as the threshold that triggers direct or indirect tax obligations in their locations. Let us further assume that International Enterprise with no physical presence in Country A and Subnational Enterprise with no physical presence in State A exceed the threshold and, as a matter of law, have direct or indirect tax obligations in Country A and State A respectively. As suggested above, and for reasons that need no elaboration, Country A’s ability to enforce International Enterprise’s legal obligations to pay or collect tax in Country A may be challenging, to say the least.

When we turn to State A’s ability to enforce Subnational Enterprise’s legal obligation to pay or collect tax in State A, the challenges are less daunting. Let us return to the facts of Wayfair (with South Dakota representing State A) to illustrate why. Let us assume that the online retailers in Wayfair — Wayfair, Overstock, and Newegg⁹⁰ — simply ignored their obligation to collect taxes in South Dakota despite the Supreme Court’s decision sustaining their obligation based on their “economic and virtual contacts” with the state. The South Dakota tax authorities, possessing prima facie evidence of the retailers’ sales exceeding the South Dakota threshold,⁹¹ could file suit in South Dakota courts seeking a judgment for the amount of taxes that the retailers failed to collect on their South Dakota sales. Assuming the retailers’ representatives did not appear in court to contest the claim, the courts would presumably issue a default judgment in favor of state taxing authorities. Although the tax authorities could not look to any South Dakota property to enforce their judgment against the remote retailers, armed with the South Dakota judgment, they could file suit against Wayfair in Massachusetts, against Overstock in Utah, and against Newegg in California seeking to enforce the South Dakota judgment against the retailers. Under the U.S. Constitution’s full faith and credit clause, which states “Full Faith and Credit shall be given in each State to the public Acts, Records, and judicial Proceedings of every other State,”⁹² courts would be required to honor the South Dakota court’s judgment in the absence of evidence that the judgment was obtained improperly.⁹³ The South Dakota tax authorities would then be able to satisfy their judgment by obtaining a lien on the companies’ property in their respective states,⁹⁴ or, more likely, by entering into a settlement agreement under which the retailers paid amounts due and agreed to comply with South Dakota’s future tax obligations.

Although the foregoing excursion into the “common legal framework” that binds the U.S. states suggests that adoption of a nexus rule based on “significant economic presence” may be more manageable from an enforcement standpoint in the U.S. subnational cross-border context than in the international cross-border context, there are two additional points that should inform a comparative inquiry into the nexus issue in the international and U.S. subnational contexts.

First, it is important to recognize that the subnational U.S. states confront issues of international cross-border trade as well as subnational cross-border trade and therefore are exposed to the same enforcement concerns described above. Thus, to continue with the example described above, assume that International Enterprise with no physical presence in State A exceeds State A’s “significant economic presence” threshold of €100,000 of annual receipts associated with customers or activities in State A and, therefore, as a matter of law, has direct or indirect tax obligations in State A. Although the State A taxing authorities would be able to obtain a default judgment against International Enterprise in the same manner as it would be able to obtain a default judgment in the wholly domestic U.S. subnational context described above, if International Enterprise has no property in other states, the default judgment would be of little value to the State A tax authorities. That is because of the “revenue rule,” under which “no country ever takes notice of the revenue law of another.”⁹⁵ Accordingly, unless the United States and International Enterprise’s home country have entered into an agreement that overrides the revenue rule and recognizes the countries’ respective tax judgments on a reciprocal basis, International Enterprise’s home country will not recognize the State A court judgment.

The United States is a signatory to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters,⁹⁶ under which countries generally agree to override the revenue rule and assist other countries with the recovery of their tax claims “as if they were its own tax claims.”⁹⁷ However, in ratifying the convention, the United States issued a reservation declining to comply with the mutual tax recovery provisions.⁹⁸ Furthermore, although some U.S. bilateral tax treaties agree to reciprocal enforcement of tax judgments,⁹⁹ these provisions (like most provisions of U.S. bilateral tax treaties, with the exception of the nondiscrimination provision), apply only to national-level income taxes.¹⁰⁰ Finally, insofar as states have adopted uniform legislation providing for recognition of foreign-country judgments in their courts with the hope that this will “make it more likely that money judgments rendered in that state would be recognized in foreign countries,”¹⁰¹ the legislation provides an exception for “a judgment for taxes” (reflecting the revenue rule),¹⁰² although some states provide that recognition of foreign tax judgments is permissible but not required.¹⁰³ Consequently, “U.S. courts are unlikely to enforce tax judgments of foreign courts, and foreign courts are highly likely to respond in kind.”¹⁰⁴ In short, it is highly unlikely that State A taxing authorities will be able to enforce a default judgment obtained in State A courts against International Enterprise in its home country.¹⁰⁵

It is important to recognize that, even in the absence of power to enforce tax compliance obligations over what an OECD working paper has described as “taxpayers that are not located in the jurisdiction of taxation,”¹⁰⁶ there are alternative approaches to addressing the problem.¹⁰⁷ First, taxing jurisdictions may enlist some other participant in the transaction or activity over which it asserts taxing rights to collect the tax or otherwise satisfy the taxpayer’s compliance obligation. For example, in the direct tax context this might take the form of a withholding obligation; in the indirect tax context, this might take the form of imposing the collection obligation on the customer.¹⁰⁸ However, as the OECD working paper observes, these approaches may be ineffective in the business-to-customer context.¹⁰⁹ Enlisting marketplace platforms to facilitate collection of tax has been the focus of considerable attention in both the international and U.S. subnational contexts, and that development is addressed below.¹¹⁰

Finally, in the absence of enforcement authority over the taxpayer or some other participant or intermediary that might be enlisted in the tax collection process, jurisdictions may adopt taxpayer registration and collection mechanisms that are sufficiently easy or attractive to induce taxpayers to comply with their tax obligations, even if they may not effectively be compelled to do so. These mechanisms are explored in detail by the OECD in its work on VAT/GST¹¹¹ and more generally and recently in the working paper noted in the preceding paragraph. The paper summarizes its conclusions regarding the efficacy of simplified registration and collection regimes as follows:

III. Allocation of Direct Taxing Rights: Formulary Apportionment and the Role of the Market

A second focus of debate in the international dialogue over taxation of the digital economy is the consideration of new approaches to the allocation of direct taxing rights, and the use of formulary methods for assigning those rights, often in conjunction with an increased recognition of taxing rights to the market state. It is another area of inquiry in which the U.S. subnational cross-border experience has something to contribute to the international debate. But this topic is neither new nor intrinsically rooted in the tax challenges of the digital economy, as was the issue of economic nexus. Indeed, the U.S. subnational experience is a “page of history”¹¹³ that proves this point.

A. A Brief History of Formulary Apportionment in The U.S. Subnational Corporate Income Tax Context

When the U.S. states began taxing corporate income in the early part of the 20th century,¹¹⁴ they generally relied on separate accounting to determine the geographic source of a taxpayer’s income through segregation of the profits attributable to a state through identification of state-specific receipts, costs, and expenses from the taxpayer’s books and records.¹¹⁵ Over the years, however, separate accounting was subjected to growing criticism. As multistate businesses expanded, particularly during the second half of the 20th century, and increasingly dominated the economies of all states in which they produced, processed, warehoused, and marketed a great number and variety of products and services, separate accounting for integrated businesses became even less viable in practice and more dubious in principle. Consequently, states generally embraced formulary apportionment as a method of attributing income to the state.

In the earliest U.S. Supreme Court decision addressing the propriety of the formulary apportionment method of income attribution, the Court approved the method in broad terms:

The formula used in the case was a single-factor property formula, whose numerator consisted of the real and tangible personal property located in the state and whose denominator consisted of all the taxpayer’s real and tangible personal property wherever located.

Although many of the early state income tax statutes used single-factor property formulas, the states gradually abandoned the traditional single-factor property formula and other single-factor formulas for more sophisticated and refined methods of dividing the corporate net income tax base. During the 20th century, a broad consensus developed that, for most manufacturing and mercantile businesses, a three-factor formula averaging the ratios of property, payroll, and sales in the state to the totals throughout the business ordinarily produced an equitable and workable division of the corporate net income among the states. Indeed, by 1978, 43 of the 45 states (and the District of Columbia) that imposed corporate income taxes used an equally weighted three-factor formula of property, payroll, and sales.¹¹⁷

Moreover, the U.S. Supreme Court recognized both the widespread acceptance of and the underlying justifications for the three-factor formula for apportioning income. The Court noted “not only has the three-factor formula met our approval, but it has become . . . something of a benchmark against which other apportionment formulas are judged.”¹¹⁸ The Court further observed that “the three-factor formula . . . has gained wide approval precisely because payroll, property, and sales appear in combination to reflect a very large share of the activities by which value is generated.”¹¹⁹ The Court declared that “the standard three-factor formula can be justified as a rough, practical approximation of the distribution of either a corporation’s sources of income or the social costs which it generates.”¹²⁰

Despite the legislative and judicial consensus that had emerged over the appropriateness of the equally weighted three-factor formula for apportioning net income, with the benefit of hindsight we now know that 1978 was the high-water mark for state income tax apportionment uniformity based on that formula. In that year, the U.S. Supreme Court sustained the constitutionality of Iowa’s single-factor sales formula in Moorman Manufacturing Co. v. Bair.¹²¹ The Court made it clear that federal constitutional protections for interstate commerce did not require judicial articulation and enforcement of uniform division-of-income rules, because it was to Congress — not the Court — “that the Constitution has committed such policy decisions.”¹²² Furthermore, since 1978, the states have increasingly abandoned the equally weighted three-factor formula for formulas that give greater — if not exclusive — weight to the sales factor for reasons that have little to do with sound state tax policy and everything to do with state economic development policy.¹²³ Indeed, only four states currently rely exclusively on the equally weighted three-factor formula.¹²⁴

B. Lessons From the U.S. Subnational Experience With Formulary Apportionment

So, what does the U.S. subnational state experience with formulary apportionment and the increased attribution of taxing rights to the market state contribute to international debate over allocation of direct taxing rights in the digital economy? I remind readers that my objective here is not to enter into this fierce debate,¹²⁵ although I have done so elsewhere,¹²⁶ but only to describe the debate and to identify the lessons that the U.S. subnational experience may contain for the international dialogue, always keeping in mind the “lost in translation” caveats in comparing U.S. subnational and international cross-border issues.

First, it reveals that formulary apportionment has a long and storied history as a recognized basis for income attribution. Indeed, formulary apportionment has been used for many years in Canada and Switzerland as a means of allocating direct taxing rights to subnational jurisdictions.¹²⁷

Second, it demonstrates that formulary apportionment is a “page of history” with some “logic,”¹²⁸ even if it is not what some observers view as “pure tax logic”¹²⁹: logic that reflects the “use of assets, performance of functions and assumption of risks” and uses “the current methodology of transfer pricing and profit allocation,” attributing profits to “where assets are held, functions are performed, and risks are assumed.”¹³⁰ Rather, formulary apportionment reflects a less scientific logic based on the perceived “impossibility of allocating specifically the profits earned by the processes conducted” by integrated enterprises “within its borders” and which “reache[s], and was meant to reach, only the profits earned within the state.”¹³¹ The U.S. Supreme Court, while endorsing the formulary apportionment method as a matter of principle, has recognized that “allocating income among various jurisdictions bears some resemblance . . . to slicing a shadow.”¹³²

Third, it reflects the recognition that “payroll, property, and sales” — i.e. capital, labor, and the market — “appear in combination to reflect a very large share of the activities by which value is generated,”¹³³ and that these factors reflect “a rough, practical approximation of the distribution of either a corporation’s sources of income or the social costs which it generates.”¹³⁴ Indeed, the European Union’s proposed Common Consolidated Corporate Tax Base, which included a three-factor income apportionment formula analogous to the formula historically used by the U.S. states, reflects a similar judgment that the market is a legitimate basis for assigning rights to tax corporate income.¹³⁵

Fourth, the U.S. experience may be read as a cautionary tale about excessive reliance on the market as a factor in assigning direct taxing rights, even in a digital economy. As legitimate as it may be to rely on the market as one of several indicators of income attribution, to rely largely or exclusively on the market as many U.S. states now do through their apportionment formulas is difficult¹³⁶ — if not impossible — to defend as a matter of tax policy. Although it may no longer be true, as the U.S. Supreme Court suggested a century ago, that the definition of income may be limited to “the gain derived from capital, from labor, or from both combined,”¹³⁷ to ignore the location of capital and labor entirely in the attribution of income arguably blinks at reality even in a digital economy.

Finally, as in the case of our discussion of nexus,¹³⁸ one should not lose sight of “lost in translation” issues when seeking to identify lessons from the U.S. subnational experience with formulary apportionment for the debate over the employment of formulary apportionment in the international context.¹³⁹ Among these are that U.S. states:

• are “bound by a common legal framework”¹⁴⁰ that governs cross-border taxation, albeit one that allows states considerable autonomy in the design of their tax systems;

• comprise “a single internal market, with a single currency, a single set of rules governing cross-border commercial behavior, and lines between taxing jurisdictions are often devoid of economic significance”;¹⁴¹ and

• generally conform to the federal corporate income tax base to which the apportionment formula is applied.¹⁴²

These factors may distinguish the U.S. subnational context from the international context regarding the appropriateness of using formulary apportionment. Indeed, one may suggest that the economic and political context in which cross-border taxation occurs in the U.S. subnational context “is particularly well suited to — if it does not virtually compel — the formulary approach.”¹⁴³

C. The OECD’s Recognition of the Potential Role Of Formulary Apportionment in Profit Allocation

The OECD has long been regarded as the bastion of the arm’s-length transfer pricing approach to the allocation of income in the international context.¹⁴⁴ This is not to suggest, however, that the OECD has failed to recognize the existence of alternative approaches to income allocation, including formulary apportionment. Until recently, however, the OECD has generally rejected formulary apportionment as a viable alternative to the arm’s-length principle.¹⁴⁵

1. The OECD’s Renewed Interest in Formulary Apportionment

The OECD’s renewed interest in formulary apportionment as a possible mechanism for the allocation of direct taxing rights in the direct tax context arose out of the OECD/G-20 BEPS project and, in particular, action 1 of the BEPS action plan, “Addressing the Tax Challenges of the Digital Economy.” In its 2015 final report on action 1,¹⁴⁶ in the chapter devoted to the “broader direct challenges raised by the digital economy and the options to address them,”¹⁴⁷ the OECD/G-20 considered the option of formulary apportionment (denominated “fractional apportionment”) in conjunction with its consideration of a “new nexus based on the concept of a significant economic presence.”¹⁴⁸ However, after observing that “most countries use profit attribution methods based on the separate accounts of the PE, rather than fractional apportionment,” that “fractional apportionment methods would be a departure from current international standards,” and that pursuing such an approach for a new nexus would produce different tax results depending on whether the business was conducted through a traditional PE or a new nexus, “fractional assessment methods were not pursued further.”¹⁴⁹

Three years later, after the OECD/G-20 established an “Inclusive Framework on BEPS” that included countries concerned with BEPS and the challenges of the digital economy, the inclusive framework issued the report, “Tax Challenges Arising From Digitalisation — Interim Report 2018: Inclusive Framework on BEPS.”¹⁵⁰ On the one hand, reflecting the judgment of the 2015 report, the 2018 report did not mention the words “fractional” or “formulary” and its one reference to “apportionment” was in the context of a discussion on the indirect taxation of intermediation services.¹⁵¹ On the other hand, in the chapter devoted to “implications of the changes arising from digitalisation for the international tax system, in particular, with respect to the existing profit allocation and nexus rules,”¹⁵² the report acknowledged that there were “different views among the more than 110 members of the Inclusive Framework” as to whether and to what extent these changes “should result in changes to the international tax rules.”¹⁵³ With this in mind, framework members agreed to review “the two key aspects of the existing tax framework, namely the profit allocation and nexus rules.”¹⁵⁴

Over the course of the next year, the work of the inclusive framework continued,¹⁵⁵ resulting in the approval in May 2019 of a “Programme of Work to Develop a Consensus Solution to the Tax Challenges Arising From Digitalisation,”¹⁵⁶ which explicitly recognized fractional apportionment as a potential method of profit allocation in the digital economy.¹⁵⁷ The work program identified the following issues and options that the framework would likely explore in connection with fractional apportionment:

• the development and evaluation of a method to determine the profits of a nonresident entity or group that would be subject to the fractional apportionment mechanism;

• the financial accounting regime and measure upon which the profit determination would be based for this purpose;

• the factors, including employees, assets, sales, and users, that could be taken into account in constructing the formula that would be used to apportion the relevant profit; and

• the design of rules to coordinate the effect of the fractional apportionment method and the current transfer pricing system, without giving rise to double taxation or double non-taxation.¹⁵⁸

2. The OECD Secretariat’s Proposal for a ‘Unified Approach’ to New Nexus and Allocation Rules Including Formulary Apportionment

Most recently, the OECD secretariat issued a public consultation document embodying its proposal for a “unified approach” to revised nexus and allocation rules addressed to the tax challenges of the digital economy.¹⁵⁹ The secretariat’s proposal explicitly endorses formulary apportionment as an element of its unified approach. Specifically, in conjunction with its recognition of a new nexus associated with the creation of new taxing rights that are appropriate for the digital age,¹⁶⁰ the secretariat’s proposal includes a “new profit allocation rule” applicable to “consumer-facing businesses” (including highly digital business models)¹⁶¹ embracing “formula-based solutions” to the allocation of taxing rights.¹⁶² At the same time, however, the secretariat’s proposal “would retain the current rules based on the arm’s-length principle where they are widely regarded as working as intended.”¹⁶³

Although the secretariat’s proposal is at best a work in progress and involves several complex issues beyond the matter of formulary apportionment, the proposal (with a focus on its formulaic aspects) may be summarized as follows.

• first, the income of a multinational enterprise would be divided into its “routine profit” and its “non-routine profit,” denominated its “deemed residual profit”;

• second, the deemed residual profit would be further divided into “Part A,” the share of the MNE’s deemed residual profit that is associated with the new nexus and new taxing rights that are inextricably linked to the digital economy, and other types of non-routine profit, such as profit associated with trade intangibles; and

• third, Part A of the MNE’s income tax base would be “allocated to particular markets meeting the new nexus rule through a formula based on sales.”¹⁶⁴

For present purposes, it remains only to observe that the secretariat’s formulary apportionment proposal, although confined to “a formula based on sales,” is not subject to the criticism of the U.S. subnational states’ increasing embrace of income apportionment formulas based entirely or largely on sales.¹⁶⁵ The distinction lies in the fact that the U.S. subnational formulas are applied to all of a taxpayer’s income — at least all that is constitutionally apportionable, meaning any income arising from the conduct of its unitary business in the state. Accordingly, the formulas necessarily apply to income that is associated factors of production (including capital and labor) that are not intrinsically associated with the market state. By contrast, the secretariat’s proposal for formulary apportionment, and other proposals advanced in the OECD’s ongoing work, are limited to the portion of the MNE’s income that is peculiarly associated with the market jurisdiction, namely the portion of the income of consumer-facing businesses that is associated with their economic — as distinguished from physical — presence in a state. Income attributable to physical capital and labor would still generally be assigned to jurisdictions “based on the arm’s-length principle where they are widely regarded as working as intended.”¹⁶⁶

IV. Digital Marketplace Platforms

We come finally to what may be the most compelling example of the common responses to the tax challenges of the digital economy in the international and U.S. subnational contexts: the recognition of the role of digital marketplace platforms in the collection of indirect taxes. Indeed, the role of marketplace platforms in today’s digital economy is difficult to overstate, and it is a role that has special significance in facilitating the collection of taxes on online sales, most of which occur over digital platforms.¹⁶⁷ If any proof were necessary to demonstrate the significance of digital marketplace platforms in the collection of indirect taxes, one need look no further than the OECD’s recent report, “The Role of Digital Platforms in the Collection of VAT/GST on Online Sales,”¹⁶⁸ in the international context and the dramatic enactment in the past few years of platform-related tax collection legislation in most U.S. states with sales taxes.¹⁶⁹

What is striking about the international and U.S. subnational digital marketplace platform developments is the similarity of the basic issues and the approaches to these issues in both contexts. To be sure, there are important differences between enlisting a platform to collect tax in a staged tax collection process under a VAT, in which the supplier ordinarily pays tax on its purchases and is entitled to an input tax credit against the taxes it collects on its supplies, and enlisting a platform to collect tax under a single-stage RST, under which the supplier ordinarily is concerned only with collection of the tax. Nevertheless, the central questions and possible answers to these questions in both contexts are often similar, and those charged with developing and implementing legislation governing the role of digital platforms in indirect tax collection may benefit from sharing their respective learning and experience in this endeavor. The ensuing discussion briefly addresses these developments, with the explicit caveat that what follows barely scratches the surface of the issues, and the interested reader is urged to consult the cited references for more detailed examination of questions raised.

A. Why Platforms?

Perhaps the first question to be asked — although the answer may be so obvious that it need not be — is why the role of digital platforms in the collection of indirect taxes on online sales has emerged as a significant issue in both the international and U.S. subnational indirect tax contexts. The answer, in the Socratic tradition of answering one question by asking another, is: “If you were charged with the administration and enforcement of indirect tax collection, would you rather deal with the millions of individual suppliers who sell their goods and services over platforms or with the relative handful of platforms that facilitate these sales?” Indeed, it has been estimated that approximately two-thirds of e-commerce sales of goods are made over digital platforms, with 57 percent of those sales made over the three largest platforms.¹⁷⁰

B. Questions Confronting Jurisdictions Seeking to Enlist Digital Platforms in Collection of Indirect Taxes

The fundamental questions confronted by jurisdictions seeking to enlist digital platforms in the collection of tax on sales they facilitate include the definition of such platforms; the specification of the platforms’ obligations; the delineation of the respective obligations of the platforms and those who sell over the platforms; and related questions regarding measures to support the practical implementation of platform legislation.¹⁷¹ It is important to recognize that these are not airtight inquiries. To the contrary, the definition of a platform is typically informed by its obligations, and the platform’s obligations are defined by reference to the respective obligations of the platform seller.

It is also important to keep in mind that while the answers to these questions ultimately lie in the sovereign authority of individual taxing jurisdictions — subject to rules that may be imposed within the framework of jurisdictions that are “bound by a common legal framework”¹⁷² — the importance of delivering consistent solutions across jurisdictions for the involvement of digital platforms in the collection of indirect taxes on online sales is widely recognized. Accordingly, the ensuing discussion describes the issues and guidance regarding the design and implementation of platform legislation provided by the OECD in the international context and by multistate intergovernmental marketplace platform working groups in the U.S. subnational context,¹⁷³ as well as by existing platform legislation.

C. Defining the Platform With Tax Collection Obligations

It is generally recognized that there is no universally accepted definition of a platform with indirect tax collection responsibilities. Indeed, there is not even a common label for these platforms, which have variously been referred to as digital platforms, marketplace platforms, marketplace facilitators, online intermediaries, to name a few. One may adopt a generic definition of such platforms, as the OECD does, describing them as “platforms that enable, by electronic means, direct interactions between two or more customers or participant groups (usually buyers and sellers) with two key characteristics:

The Multistate Tax Commission’s marketplace facilitator work group¹⁷⁵ observed that there were both and narrow and broad definitions of the terms “marketplace facilitator” and “marketplace provider,” which are terms commonly used in U.S. subnational state marketplace platform legislation,¹⁷⁶ with the narrow definition requiring the platform’s processing of the seller’s payment, and the broader definition containing no such requirement.¹⁷⁷ As of late 2019, 18 states had adopted the narrow definition and 15 states had adopted the broad definition.¹⁷⁸

As the MTC work group’s effort to describe the definition of a platform suggests, the most instructive approach to the definitional issue may involve identification of functions performed by such platforms (as reflected in legislation or other guidance) — an approach the OECD also endorses. Thus, the OECD provides a non-exhaustive list of functions that may lead to characterization of the platform as the supplier under a VAT/GST regime, with full liability for collecting and remitting the VAT/GST on online sales over its platform. These include:

• controlling and/or setting the terms of the underlying transactions (e.g., price, payment terms, delivery conditions) and imposing these on participants in the transaction (e.g., buyers, sellers, transporters);

• direct or indirect involvement in payment processing;

• direct or indirect involvement in the delivery process; and

• providing customer support services.¹⁷⁹

At the same time, the OECD provides a list of functions that might lead to the exclusion of the digital platform from the “full liability” regime. These include:

• only carrying content;

• only processing payments;

• only advertising offers; and

• only operating as a click-through/shopping referral program.¹⁸⁰

By way of comparison, one can clearly perceive the general similarity between the OECD’s definitional approach and the U.S. subnational approach (as reflected in California’s marketplace facilitator legislation, which falls within the broader definition as described by the MTC work group).¹⁸¹ Effective October 1, California treats a marketplace facilitator as the seller and retailer for each sale of tangible personal property “facilitated through its marketplace” for determining whether the marketplace facilitator must comply with California’s tax registration and collection obligations.¹⁸² The marketplace facilitator’s own sales are combined with its facilitated sales to determine whether it exceeds California’s $500,000 annual threshold that triggers the tax compliance obligations.¹⁸³

A marketplace facilitator is a person who contracts with marketplace sellers to facilitate the sale of the marketplace seller’s products through a marketplace and who, directly or indirectly, engages in one of the following activities:

• transmitting or otherwise communicating the offer or acceptance between the buyer and seller;

• owning or operating the infrastructure, electronic or physical, or technology that brings buyers and sellers together;

• providing a virtual currency that buyers are allowed or required to use to purchase products from the seller; or

• software development or research and development activities related to any of the activities described in paragraph (2) [below] if such activities are directly related to a marketplace operated by the person or a related person.¹⁸⁴

In addition, to qualify as a market facilitator, the person must, directly or indirectly, engage in one of the following activities regarding the marketplace seller’s products:

• payment processing services;

• fulfillment or storage services;

• listing products for sale;

• setting prices;

• branding sales as those of the marketplace facilitator;

• order taking; or

• providing customer service or accepting or assisting with returns or exchanges.¹⁸⁵

The California legislation exempts newspapers, websites, and other advertisers of property for sale that “do not transmit or otherwise communicate the offer and acceptance for the sale of tangible personal property between the seller and purchaser”¹⁸⁶ from its definition of “marketplace facilitator.” The legislation also exempts delivery network companies that maintain “an internet website or mobile application used to facilitate delivery services for the sale of local products.”¹⁸⁷

D. Specifying the Obligations of the Platforms

The key question regarding the obligations of platforms is whether they are effectively to be treated as the supplier or seller, with all tax collection and remittance obligations associated with that characterization,¹⁸⁸ or are responsible for a more limited subset of tax-related obligations, such as information reporting. The answer to this question, as we have already suggested,¹⁸⁹ is likely to turn in part on the definition of the platform and whether that definition encompasses functions that make it appropriate to treat the platform as the supplier or seller with their traditional tax collection and compliance obligations. Thus, if the platform is defined as an entity that sets the terms of the underlying transactions, processes the payments, and arranges for the delivery of the goods or services, it would likely (and appropriately) be treated as the supplier or seller for purposes of tax collection and remittance obligations, even if it did not technically hold title to the goods or services sold over the platform.¹⁹⁰ Indeed, in this connection, it may be worth recalling that in the U.S. subnational context, platforms have sometimes been treated as sellers subject to tax collection obligations under general sales and use tax provisions in the absence of legislation specifically directed at platforms.¹⁹¹ In other words, if it looks like a duck, swims like a duck, and quacks like a duck, it probably is a duck.

By a parity of reasoning, if the definition of the platform does not require that the platforms set the terms of the underlying transactions, or process the payments, or arrange for delivery of the goods or services, but embraces platforms that do no more than refer buyers to sellers, it would be less likely and less appropriate to saddle such platforms with tax collection obligations. In the U.S. subnational context, such platforms, often defined as referrers, typically are subject to notice and reporting requirements but not to mandatory tax collection requirements.¹⁹² The OECD report on digital platforms likewise recognizes that information reporting obligations (as distinguished from a full VAT/GST liability regime) may be appropriate for platforms, in light of the practical reality that “the scope of the full VAT/GST liability may be limited in practice, and that other obligations on platforms may be desirable for jurisdictions in terms of effective tax collection.”¹⁹³

E. Specifying the Respective Obligations of Platforms and Those Who Sell Over Platforms

In principle, specifying the respective obligations of platforms and those who sell over platforms (often referred to as marketplace sellers in the U.S. subnational context) should not raise major difficulties. Indeed, in its guidance on overarching design considerations regarding the full VAT/GST liability regime, the OECD succinctly captures its recommendation in a brief paragraph, which advises that jurisdictions:

Nevertheless, this may be easier said than done, and both the OECD and the multistate intergovernmental marketplace platform working groups in the U.S. subnational context have identified several issues about which there is or may be uncertainty regarding the obligations of platforms and platform sellers.¹⁹⁵ These issues, which are identified in both the OECD and U.S. subnational platform guidance and will undoubtedly be the focus of ongoing work in both contexts, include:

• ensuring that the platform liability regime does not have any impact on the normal VAT/GST deduction rules for the underlying supplier;¹⁹⁶

• determining the relationship between distance selling rules and thresholds for platforms and for suppliers or marketplace sellers and, in particular, whether direct sales and marketplace sales are to be aggregated or segregated for purposes of determining whether the threshold has been exceeded;

• ensuring that underlying suppliers or marketplace sellers provide reliable information to platforms that are necessary for platforms’ compliance with their tax collection and reporting obligations;

• determining circumstances, if any, under which suppliers or marketplace sellers may enter voluntary agreements as to which party has tax collection and reporting obligations; and

• developing rules to limit compliance risks for platforms acting in good faith and having made reasonable efforts to ensure compliance, based on information provided by underlying suppliers/marketplace sellers.

F. Simplifying Compliance Obligations

Guidance on platform legislation in both the international and subnational contexts strongly endorses the adoption of measures to simplify reporting and collection obligations to achieve maximum levels of compliance. These recommendations in substance fall within the broader guidance in both contexts for adoption of simplified approaches to the collection of indirect taxes on sales by remote sellers, who may not be subject to the jurisdiction’s enforcement powers.¹⁹⁷ Indeed, we have already alluded to this guidance in connection with our discussion of nexus, namely, the OECD report on “Mechanisms for the Effective Collection of VAT/GST Where the Supplier Is Not Located in the Jurisdiction of Taxation”¹⁹⁸ and the U.S. states’ SSUTA,¹⁹⁹ which embraces a variety of tax compliance simplification measures.

Thus, the OECD’s platform report observes:

Similarly, a U.S. subnational marketplace facilitator working group focuses on the importance of return simplification and notes that SSUTA guidance may be helpful in reducing platform-related compliance burdens.²⁰¹

V. Conclusion

If the preceding discussion has accomplished nothing else, it has revealed the common problems confronting national and subnational jurisdictions in addressing the cross-border tax challenges of the digital economy. We are clearly just beginning to grapple with the appropriate solutions to these problems. Accordingly, without minimizing the important political and economic differences between the international and subnational contexts, one may suggest that those charged with resolving these problems at the international and subnational levels would be well advised to share their knowledge and experience as they undertake their respective tasks.

APPENDIX
Table 1. Post-Wayfair Nexus Rules for Remote Sellers
(as of November 2019)

State	Annual Sales Threshold	Annual Transaction Threshold	Effective Date*	SSUTA Member
Alabama	$250,000 (goods only)	Not applicable	Oct. 1, 2018	No
Arizona	2019: $200,000; 2020: $150,000; 2021: $100,000	Not applicable	Oct. 1, 2018	No
Arkansas	$100,000	200	July 1, 2019	Yes
California	$500,000	Not applicable	Apr. 1, 2019	No
Colorado	$100,000	Not applicable	Dec. 1, 2018	No
Connecticut	$100,000 and	200	July 1, 2019	No
District of Columbia	$100,000	200	Jan. 1, 2019	No
Georgia	2019: $250,000 (goods only); 2020: $100,000 (goods only)	200 (goods only)	Jan. 1, 2019	Yes
Hawaii	$100,000	200	July 1, 2018	No
Idaho	$100,000	Not applicable	June 1, 2019	No
Illinois	$100,000	200	Oct. 1, 2018	No
Indiana	$100,000	200	Oct. 1, 2018	Yes
Iowa	$100,000	Not applicable	Jan. 1, 2019	Yes
Kentucky	$100,000	200	Oct. 1, 2018	Yes
Louisiana	$100,000	200	Jan. 1, 2019	No
Maine	$100,000	200	July 1, 2018	No
Maryland	$100,000	200	Oct. 1, 2018	No
Massachusetts	$100,000	Not applicable	Oct. 1, 2017	No
Michigan	$100,000	200	Oct. 1, 2018	Yes
Minnesota	$100,000	200	Oct. 1, 2018	Yes
Mississippi	$250,000	Not applicable	Sept. 1, 2018	No
Nebraska	$100,000	200	Jan. 1, 2019	Yes
Nevada	$100,000	200	Nov. 1, 2018	Yes
New Jersey	$100,000	200	Nov. 1, 2018	Yes
New Mexico	$100,000	Not applicable	Oct. 1, 2018	No
New York	$500,000 and	100	Jan. 15, 2019	No
North Carolina	$100,000	200	Nov. 1, 2018	Yes
North Dakota	$100,000	Not applicable	Oct. 1, 2018	Yes
Ohio	$100,000	200	Aug. 1, 2019	Yes
Oklahoma	$100,000	Not applicable	July 1, 2018	Yes
Pennsylvania	$100,000	Not applicable	Mar. 1, 2018	No
Rhode Island	$100,000	200	Aug. 17, 2017	Yes
South Carolina	$100,000	Not applicable	Nov. 1, 2018	No
South Dakota	$100,000	200	Nov. 1, 2018	Yes
Tennessee	$500,000	Not applicable	July 1, 2019	Associate Member
Texas	$500,000	Not applicable	Oct. 1, 2019	No
Utah	$100,000	200	Jan. 1, 2019	Yes
Vermont	$100,000	200	July 1, 2018	Yes
Virginia	$100,000	200	July 1, 2019	No
Washington	$100,000	Not applicable	Oct. 1, 2018	Yes
West Virginia	$100,000	200	Jan. 1, 2019	Yes
Wisconsin	$100,000	200	Oct. 1, 2018	Yes
Wyoming	$100,000	200	Feb. 1, 2019	Yes
*Some states have modified their effective date rules since the adoption of their remote seller nexus rules, and one should consult current state statutes and administrative guidance to determine if the original effective date has been modified.

Table 2. State Marketplace Platform Legislation (as of November 2019)

State	Obligations	Thresholds	Effective Date
Alabama	Collect and remit or comply with notice/information reporting requirements	$250,000 aggregate platform sales	Dec. 1, 2019
Arizona	Collect and remit	$100,000 aggregate platform sales	Oct. 1, 2019
Arkansas	Collect and remit	$100,000 aggregate platform sales or 200 transactions	July 1, 2019
California	Collect and remit	$500,000 aggregate platform sales	Oct. 1, 2019
Colorado	Collect and remit	$100,000 aggregate platform sales	Oct. 1, 2019
Connecticut	Collect and remit	$250,000 aggregate platform sales	Dec. 1, 2018
District of Columbia	Collect and remit	$100,000 aggregate platform sales or 200 transactions	Apr. 1, 2019
Hawaii	Collect and remit	$100,000 aggregate platform sales or 200 transactions	Jan. 1, 2020
Idaho	Collect and remit	$100,000 aggregate platform sales	June 1, 2019
Illinois	Collect and remit	$100,000 aggregate platform sales or 200 transactions	Jan. 1, 2020
Indiana	Collect and remit	$100,000 aggregate platform sales or 200 transactions	July 1, 2019
Iowa	Collect and remit	$100,000 aggregate platform sales or 200 transactions	Jan. 1, 2019
Kentucky	Collect and remit	$100,000 aggregate platform sales or 200 transactions	July 1, 2019
Maine	Collect and remit	$100,000 aggregate platform sales or 200 transactions	Oct. 1, 2019
Maryland	Collect and remit	$100,000 aggregate platform sales or 200 transactions	Oct. 1, 2019
Massachusetts	Collect and remit	$100,000 aggregate platform sales	Oct. 1, 2019
Minnesota	Collect and remit	$100,000 aggregate platform sales or 200 transactions	Oct. 1, 2018
Nebraska	Collect and remit	$100,000 aggregate platform sales or 200 transactions	Apr. 1, 2019
Nevada	Collect and remit	$100,000 aggregate platform sales or 200 transactions	Oct. 1, 2019
New Jersey	Collect and remit	None	Nov. 1, 2018
New Mexico	Collect and remit	$100,000 aggregate platform sales	Oct. 1, 2019
New York	Collect and remit	$500,000 aggregate platform sales or 100 transactions	June 1, 2019
North Carolina	Collect and remit	$100,000 aggregate platform sales or 200 transactions	Feb. 1, 2020
North Dakota	Collect and remit	$100,000 aggregate platform sales	Oct. 1, 2019
Ohio	Collect and remit	$100,000 aggregate platform sales or 200 transactions	Aug. 1, 2019
Oklahoma	Collect and remit tax or comply with notice/information reporting requirements	$10,000 aggregate platform sales	July 1, 2018
Pennsylvania	Collect and remit	$100,000 aggregate platform sales	July 1, 2019
Rhode Island	Collect and remit	$100,000 aggregate platform sales or 200 transactions	July 1, 2019
South Carolina	Collect and remit	$100,000 aggregate platform sales (per administrative guidance)	Apr. 1, 2019
South Dakota	Collect and remit	$100,000 aggregate platform sales or 200 transactions	Mar. 1, 2019
Texas	Collect and remit	$500,000 aggregate platform sales	Oct. 1, 2019
Utah	Collect and remit	$100,000 aggregate platform sales or 200 transactions	Oct. 1, 2019
Vermont	Collect and remit	$100,000 aggregate platform sales or 200 transactions	June 1, 2019
Virginia	Collect and remit	$100,000 aggregate platform sales or 200 transactions	July 1, 2019
Washington	Collect and remit	$100,000 aggregate platform sales	Jan. 1, 2020
West Virginia	Collect and remit	$100,000 aggregate platform sales or 200 transactions	July 1, 2019
Wisconsin	Collect and remit	$100,000 aggregate platform sales or 200 transactions	Oct. 1, 2019
Wyoming	Collect and remit	$100,000 aggregate platform sales or 200 transactions	July 1, 2019